Taiwan energy

A storm avoided

March 6th 2019 | Taiwan | Renewables

Wind energy is an important area of Taiwan's energy sector policy, despite only representing a small share of total domestic capacity. This importance is due to a combination of favourable conditions for wind-power generation in the Taiwan Strait, the freeze on nuclear-power capacity and public pressure to reduce air pollution through the use of renewable energy generation. Following a temporary setback related to tariff rates, The Economist Intelligence Unit still expects the share of wind power in Taiwan's energy mix to increase in 2019‑23, with spillover benefits for the island's global competitiveness in wind-power technology.

The majority of the electricity that Taiwan generates comes from coal, liquefied natural gas (LNG) and nuclear power. Renewable energy represented only 4.6% of total domestically generated electricity in 2017, up from 3.4% in 2007. This modest expansion was driven by an increase in solar-power capacity. In contrast, wind power represents a minority share of renewables, constituting only 1.2% of total energy generation capacity in 2017.

Wind is picking up

In spite of a slow start, we expect wind power to expand at a more rapid pace in the coming years. We believe that the governing Democratic Progressive Party (DPP) remains committed to a capping of nuclear-power capacity, despite softening its previous pledge to phase out nuclear power by 2025 in the wake of the November 2018 referendum results. Public concerns over air pollution—an issue which was also represented in the recent referendums—will further constrain the DPP's policy toward power-generation from fossil fuels. It was partly on this basis that officials passed amendments to the Renewable Energy Development Act in 2018, which set a goal of 5.5 GW of wind-power capacity by 2025, up from a total capacity of 692.4 MW in 2017.

The fact that issues relating to air pollution now garner wide public interest suggests that an emphasis on reducing fossil-fuel use will persist throughout 2019‑23. This would even be the case were the presidency to pass from the DPP to the opposition Kuomintang (KMT), although this scenario is, in any case, outside our core forecast. Furthermore, we expect that these efforts will increasingly focus on wind power, owing to the enormous potential for energy generation from this source within Taiwan's territory. A combination of shallow coastal waters and year-round high wind speeds ensure that the Taiwan Strait is home to some of the best potential offshore wind turbine sites in the world.

Prospects blown away?

To achieve the amendments to the Renewable Energy Development Act passed in 2018, authorities have relied on a feed-in tariff (FIT) scheme that was introduced under the previous KMT administration (2008‑16). FITs are subsidies offering estimated production cost payments to eligible energy producers, to encourage investment in particular energy sources. In the case of wind power in Taiwan, there are different tariff rates for onshore and offshore wind categories. Under the current "demonstration" phase of national wind-power policy, running from 2016 to 2020, the government has agreed to 20-year FIT contracts (with fixed or two-phase pricing), to reassure investors of the financial viability of the projects. It has also awarded installation subsidies for several projects. A high number of foreign investment applications in 2018 indicated the success of the incentives in attracting international interest.

However, in November 2018 the Ministry of Economic Affairs (MOEA) proposed cutting the offshore FIT for 2019 by 12.7% from the NT$5.849/MWh (US$0.195) rate set in 2018. This prompted objections from foreign investors, including a Danish wind-power company, Ørsted Offshore. The company was forced to forfeit its access to the 2018 FIT schedule owing to the failure of the Bureau of Energy to issue a mandatory establishment permit in time, so in the face of a much lower FIT rate it announced the suspension of plans for two wind farm projects in the Taiwan Strait with a substantial combined capacity of 900 MW. After much speculation by the private sector and media on the matter, the MOEA announced in late January that it would instead cut the offshore FIT rate by 5.7% from 2018 levels. Ørsted and other developers responded with cautious optimism to the new FIT rates, acknowledging government efforts to moderate the tariff cut in recognition of investor concerns.

From a storm to a breeze

The originally proposed FIT cut would probably have necessitated a change to our forecast for Taiwan to meet its 5.5‑GW wind-power capacity target shortly after 2025, on account of an expected decline in foreign investment. However, the confirmation of a more modest reduction in the FIT from this year means that we are still confident in this forecast, and that wind power will reach around 3% of national capacity by 2023, from 1.2% in 2017.

More generally the continued stream of new projects, many of which will be collaborations between domestic and foreign companies, will help Taiwan to raise its indigenous design and production capabilities to internationally competitive standards in the medium term. Taiwan already has the foundations to support an offshore wind-power industry in the form of a highly developed electrical machinery manufacturing subsector and advanced research-and-development infrastructure. The outlook for the wind-energy sector in 2019‑23 therefore remains very positive.